I have seen many articles and heard countless comments about the looming “Tax Cliff”, Taxmageddon or “Fiscal Cliff”. The best article I have seen is from the Journal of Accountancy published by the American Institute of Certified Public Accountants (AICPA).
I will summarize the article in two parts: Individuals and Businesses.
In June 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which dramatically reduced income, estate, and gift tax rates and changed Qualified and Retirement Plan rules. Changes were set to be phased in over 9 years but the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) accelerated many of the provisions. The EGTRRA was written in a manner that allowed the changes to “sunset” or revert back on January 1, 2011.
In order to avoid this happening, Congress enacted a short-term solution in mid-December 2010 called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (Tax Relief Act) which extended the ordinary income tax rates and the capital gains tax rates, reinstated the estate tax at a reduced rate, and extended a large number of expired or expiring provisions. Many of the Tax Relief Act extensions expired at the end of 2011 and the rest will expire at the end of this year.
In August, the Senate Finance Committee approved a bill, the Family and Business Tax Cut Certainty Act of 2012, that would extend some, but not all, of the expired provisions through 2013. This may signal that, when Congress does act, it will not extend every expired provision because of the cost in lost federal revenue. Tax provisions for individuals that the bill focused on included restoring the alternative minimum tax (AMT) patch, the deduction for state and local sales tax, and parity for employer-provided mass transit and parking benefits. Provisions for businesses included extending the research and development credit, the work opportunity credit, and the increased Sec. 179 amounts. In all, the bill would extend or restore 11 provisions for individuals, 28 for businesses, and 13 energy incentives. However, the bill did not address the impending changes to income, estate and capital gains tax rates.
PROVISIONS SET TO EXPIRE AT THE END OF 2012
Tax rates. EGTRRA introduced a new 10% tax bracket below the 15% bracket for individuals and reduced the other tax brackets to 25%, 28%, 33%, and 35%. Those changes are scheduled to sunset after 2012 so that in 2013 the 10% rate will disappear (with income in that bracket reverting to the 15% bracket) and the other rates will revert to 28%, 31%, 36%, and 39.6%, respectively.
In 2003, JGTRRA also lowered the capital gains tax rate to 15% (0% for taxpayers in the 10% and 15% income tax brackets). These rate changes are also scheduled to expire after 2012. The rates will revert to 10% for taxpayers in the 15% income tax bracket and 20% for other brackets (8% or 18% for property held more than five years (but to qualify for the 18% rate, the holding period must begin after Dec. 31, 2000)). The taxation of qualified dividend income at capital gains rates will also expire at the end of 2012.
EGTRRA’s repeal of the itemized deduction phaseout and the personal exemption phaseout is also scheduled to expire after 2012.
Payroll tax reduction. The lower 4.2% rate for employees’ portion of the Social Security payroll tax will expire at the end of 2012 and revert to 6.2%.
AMT provisions. The 0% and 15% capital gains rates for the AMT, the AMT offset of the child tax credit, and the 7% AMT preference for excluded gain on the disposition of qualified small business stock are scheduled to expire at the end of 2012. It is expected that more taxpayers will be subject to the AMT.
Bonus depreciation and Sec. 179 expensing. The Tax Relief Act sets the expensing limitation under Sec. 179 at $125,000 and the phaseout threshold amount at $500,000 for 2012. For tax years beginning after 2012, these amounts reduce to $25,000 and $200,000, respectively.
The availability of an additional 50% first-year bonus depreciation expires at the end of 2012. The election to accelerate AMT credits in lieu of bonus depreciation will also expire.
Estate, gift, and GST tax. The Tax Relief Act reinstated the estate, gift, and generation-skipping transfer (GST) tax at a rate of 35% and an estate, gift, and GST tax exemption of $5 million ($5.12 million in 2012, adjusted for inflation). In addition to the increase in the exemption amount, for decedents dying after 2010, the estate tax exemption of the first spouse to die is “portable.” That is, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount.
After 2012, if Congress does not act, the estate, gift, and GST tax regime that existed in 2000 will return. The exemption amount will be $1 million, and the top rate will be 55%.
Other Individual provisions:
- Marriage penalty relief (i.e., the increased size of the 15% rate bracket) and increased standard deduction for married taxpayers filing jointl
- The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one)
- The $1,000 child tax credit amount (scheduled to revert to $500) and the expanded refundability of the credit
- The American opportunity tax credit
- The increased starting and ending points for the earned income tax credit and the increase in the credit amount for families with three or more qualifying children
- Refundability of the credit for prior-year minimum tax liability
- Exclusion from gross income for discharge of indebtedness on a principal residence
- The exclusion for National Health Services Corps and Armed Forces Health Professions Scholarships
- The exclusion for employer-provided educational assistance
- The enhanced rules for student loan deductions introduced by EGTRRA
- The higher contribution amount and other EGTRRA changes to Coverdell Education Savings Accounts
- The disregard of taxpayers’ refunds in the administration of certain federal programs
In addition to the large number of provisions scheduled to expire, many provisions expired at the end of 2011 and have not been reenacted.
Provisions for Individuals
Increased AMT exemption. Congress has temporarily increased the AMT exemption amount several times in recent years. These successive increases are commonly referred to as the “AMT patch.” The Tax Relief Act increased the AMT exemption amounts, but only for 2010 and 2011. With the AMT patch now expired, the AMT exemption has reverted to its statutory amount: $45,000 for married filing jointly, less 25% of alternative minimum taxable income (AMTI) exceeding $150,000; and $33,750 for unmarried individuals, less 25% of AMTI exceeding $112,500.
Personal credits allowed against regular tax and AMT. Starting in 2012, nonrefundable credits generally cannot be used to offset AMT. A few exceptions apply, including the adoption credit; the child tax credit; the American opportunity tax credit; the retirement savings credit; the residential energy-efficient property credit; the non-depreciable property portion of the alternative motor vehicle credit and the non-depreciable property portion of the new qualified plug-in electric drive motor vehicle credit.
Transit pass parity with parking benefits. The maximum amount an employee can exclude from income for employer-provided transit passes and transportation in a commuter highway vehicle for 2012 is $125 per month, down from $230 per month in 2011.
Other expired items affecting individuals include:
- The expanded adoption credit and adoption-assistance programs
- The non-business energy property credit
- The deduction of up to $250 for certain elementary and secondary school teacher expenses
- Deductibility of mortgage insurance premiums (PMI) as interest
- Deductibility of state and local sales tax instead of state income taxes on Schedule A
- The above-the-line deduction of up to $4,000 for qualified tuition and related expenses
- The tax-free treatment of charitable distributions from IRAs
- The District of Columbia first-time homebuyer credit
- The temporary 100% exclusion of gain from the sale of certain small business stock
More in my next post about Business deductions…………